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It’s the million-dollar question — quite literally: How much should I save for retirement?
There is a general rule of thumb: When saving for retirement, most experts recommend an annual retirement savings goal of 10% to 15% of your pre-tax income. High earners generally want to hit the top of that range; low earners can typically hover closer to the bottom since Social Security may replace more of their income.
But there is no perfect formula. More than likely, your retirement goal will depend on your future, both the known and unknown parts, such as:
Your life expectancy
Your current spending and saving levels
Your lifestyle preferences in retirement
Here are four steps to figure out how much you should save for retirement.
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1. Estimate retirement income needs
Fair warning: This step involves the most work — but power through, because the others are a breeze. And if you keep even a loose budget, you already have a leg up. Projecting future income requirements begins by taking a look at current spending.
To do that, enter your typical monthly expenses in the first column of a spreadsheet or jot them on a piece of paper. Then do a little thinking about whether each expense will stay the same, go down, go up or — best of all — disappear in retirement. In a second column, write your best guess of what each expense will be in retirement.
Add those up, tack on other things, such as travel, that you may not budget for now, but want to spend money on later. Then you will have a rough idea of your monthly spending needs in the future. Multiply by 12 to get the income you’ll need each year to meet those expenses in retirement. Compare that with your current income to arrive at what’s called a replacement ratio, or how much of your income you should aim to replace in retirement.
2. Consider common rules of thumb
According to the 2023 Employee Benefit Research Institute’s retirement confidence survey, 64% of American workers feel confident they will have enough money to live comfortably in retirement. That's down from 73% in 2022. And 62% of workers cite debt as a problem. If you need to adjust your retirement plan because of debt, rising costs, a job loss or other financial burden, it may be a good idea to keep some financial rules of thumb in mind.
The one used most often is the 80% rule, which says you should aim to replace 80% of your preretirement income. This is a loose rule: Some people suggest skewing toward 70%; some think it’s better to aim for a more conservative 90%.
To figure out where you land, consider what percentage of your income you’re saving for retirement. You’ll no longer have to do that once you cross the hypothetical finish line, which means if you’re saving 15% now, you could easily live on 85% of your income without adjusting expenses. Add in Social Security, cut payroll taxes — which eat 7.65% of your income while you’re working — and you can probably adjust that income down even further.
» Learn more: Everything you need to know about how to save for retirement
The best way to use a rule of thumb like this is as a gut check against the more tailored approach of taking a deep dive into your expenses. Are you way off the standard advice or pretty close? But it can also be used as a starting point of its own, from where you can wiggle the numbers.
3. Use a retirement calculator
If your estimates are correct, a good retirement calculator will give you an assessment of where you stand in your savings progress, by combining those annual spending estimates with projections. Most thorough calculators bake in assumptions that are based on research: There will be defaults for inflation projections, life expectancy and market returns.
» Run the numbers: Use NerdWallet’s retirement calculator to estimate your future needs
To get the most accurate result, you should consider whether those assumptions are correct given your situation: Is your investment strategy poised to hit the default return used by a calculator, which will probably hover around 6% or 7%? If you’re skewing toward bonds, you’re going to want to adjust that down. Did your grandparents and great grandparents live to 110? You’ve got good — but expensive — genes. Take those extra years you may live into account in your projections.
4. Revisit regularly
Circumstances change and your retirement needs will change with them. Whether it’s a new job, a new baby or a new passion to travel the world once you hit 65, it makes sense to perform these retirement calculations fairly often. It’s always better to adjust as you go, rather than struggle to catch up down the road.
If you feel overwhelmed, it's easy to get help with balancing your financial goals. Choices range from low-fee online robo-advisors to financial advisors offering a variety of services. Learn more about how to choose a financial advisor that's right for you.
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